CPS four notches above junk bond status

In what’s become a torrent of bad news regarding Illinois’ fiscal health, Moody’s Investors Service has downgraded Chicago Public Schools’ $6.3 billion general obligation debt one notch. The credit rating agency’s outlook remains negative, and CPS debt is now just four levels above junk bond status. The CPS ranking drop to A3 from A2 follows recent downgrades...

In what’s become a torrent of bad news regarding Illinois’ fiscal health, Moody’s Investors Service has downgraded Chicago Public Schools’ $6.3 billion general obligation debt one notch. The credit rating agency’s outlook remains negative, and CPS debt is now just four levels above junk bond status.

The CPS ranking drop to A3 from A2 follows recent downgrades to Evanston, the city of Chicago and the state of Illinois, all because of overly burdensome pension debt. The Chicago Teachers’ Pension Fund, or CTPF, had a 2012 funding shortfall of more than 40%, or $8 billion. That’s partially the result of a five-year return rate of 0% on its investments, way short of its assumed 8% return rate.

Moody’s has long critiqued the use of overly ambitious investment return targets that allow funds to understate their true pension shortfalls. Moody’s recently began using a new methodology with more conservative investment assumptions. When Moody’s applied this methodology to CTPF’s 2011 pension shortfall, it found that the shortfall jumped more than 60%, to $11.1 billion from $6.8 billion.

Though Moody’s has not yet released the same calculation for 2012, CTPF should expect its official 2012 calculation of $8 billion to jump to nearly $14 billion.

According to Moody’s, the CPS downgrade “reflects a leveraged overall debt burden resulting from significant debt and pension obligations of overlapping governmental entities on the district’s tax base, particularly the city of Chicago.”

Said more simply: there are many troubled pension funds in Chicago, but only one set of taxpayers. Chicago taxpayers are on the hook not just for the CTPF shortfall, but also for the city of Chicago’s four pension funds, the Chicago Transit Authority Pension Plan and the Park Employees Benefit and Annuity Plan. Unfortunately, these other funds are in no better shape.

Chicago taxpayers getting squeezed

Chicago taxpayers are on the hook for all of these pension shortfalls. Together, the city’s four major pension funds (fire, labor, municipal and police) have only $0.35 in assets for every dollar of liability, and the situation has worsened dramatically since 1998.

According to official numbers, this means a $19 billion hole. But based on new Moody’s methodology, Chicago’s shortfall jumps to $36 billion. That’s more than $13,000 per Chicago resident and nearly double Detroit’s per capita shortfall.

Without comprehensive reform, taxpayers will also be expected to bail out CTPF, the Retirement Plan for Chicago Transit Authority Employees and Park Employees’ Annuity and Benefit Plan. Those three funds all have official shortfalls totaling another $9.6 billion. And that’s without the new Moody’s methodology.